BofA in talks with Fannie Mae over mortgage dispute -sources

* Bank's total claims increased by more than 40 percent in
second quarter

By Rick Rothacker

Aug 2 (Reuters) - Bank of America Corp is in talks
with Fannie Mae to resolve a dispute over bad
mortgages that the government-controlled entity wants the No. 2
U.S. bank to buy back, sources familiar with the matter said.

The two sides have been in discussions for some time, but
the talks have become more constructive recently, the sources
said, although they cautioned a resolution is not imminent.

At issue are billions of dollars of mortgages that Bank of
America and its Countrywide Financial subsidiary sold to Fannie
Mae from 2004 to 2008, during the U.S. housing boom. As the
loans go bad, Fannie wants Bank of America to buy them back.

Bank of America has balked at buying back some of the loans.
In recent quarters, it has said that Fannie Mae is increasingly
asking it to purchase loans in which borrowers made payments for
more than two years or that went bad more than a year-and-a-half
earlier.

The bank contends these loans soured due to economic
conditions and other reasons rather than poor underwriting or
lack of proper documentation, which are common causes for
repurchase requests.

The dispute has become so tense that at the end of January,
Fannie did not renew a contract with Bank of America to buy some
of its home loans. The bank still sells mortgages to Freddie Mac
and keeps loans in its own portfolio.

Bank of America and Fannie Mae declined to comment. In its
most recent quarterly filing, in May, Fannie Mae said it
continued to work with Bank of America to resolve the issue, but
hadn't changed its estimates of the amounts it ultimately
expected to collect from the bank.

During the bank's earnings conference call last month, Chief
Financial Officer Bruce Thompson said the spat would either end
in a settlement or legal action.

Other banks have said that Fannie Mae and Freddie Mac have
been asking them to buy back more loans, but the problem is most
acute for Bank of America. That's because in 2008 it bought
subprime lender Countrywide, which produced some of the most
toxic loans during the housing bubble.

Bank of America last month said total repurchase requests
outstanding increased more than 40 percent to $22.7 billion in
the second quarter from the first quarter, spurring investor
concern that the bank will be on the hook for more
mortgage-related losses.

Claims from Fannie Mae and Freddie Mac represented a little
less than half of the total. Claims from private investors that
bought loans from the bank also jumped.

Bank of America has about $16 billion in reserves set aside
for these claims, which includes money to cover an $8.5 billion
settlement reached in 2011 with private investors that bought
securities backed by Countrywide loans. That agreement still
needs court approval.

The bank's executives have cautioned that the $22.7 billion
in claims doesn't represent potential losses for the bank but
simply the unpaid balances of the loans in question. Those loans
are backed by collateral, and in settlement agreements the bank
has typically paid pennies on the dollar of actual losses.

The bank, however, has said more claims could still come in
from the government-controlled entities and private investors.

In a report this week, Bernstein analyst John McDonald
estimated that Bank of America has worked through about
two-thirds of its potential repurchase requests and that it may
eventually pay another $5 billion above its existing reserves.
The bank has also estimated that it could pay an additional $5
billion above its reserves.

In the report, McDonald also said he assumed that one of the
private investors that has requested the bank to buy back
mortgages is actually Fannie Mae or Freddie Mac. That's because
the government-controlled entities also bought so-called
private-label mortgage-backed securities for their own
portfolios.

Fannie Mae and Freddie Mac said they are looking out for
U.S. taxpayers in making repurchase requests. That's because the
two entities were placed into government conservatorship in 2008
as their losses ballooned. Fannie has said in a securities
filing that it may need more funds from the U.S. Treasury if it
collects less than expected from Bank of America.

Bank of America has far more Fannie Mae mortgage repurchase
requests than any other bank. As of March 31, it accounted for
58 percent of the entity's total, according to Fannie's most
recent quarterly securities filing. The bank with the second
most requests, JPMorgan Chase & Co, accounted for 10
percent of the total.